Bankruptcy - what happens if the petitioning creditor has an ulterior purpose?

Summary: On 8 September 2016 Mr Justice Snowden handed down his judgment in Glenn Maud v Aabar Block Sarl & others [2016] EWHC 2175 (Ch) in which he considered how the court should deal with a bankruptcy petition where the petitioning creditor may have an ulterior purpose for seeking a bankruptcy order.

It is a fundamental principle of English bankruptcy law that if a petitioning creditor has an undisputed and clearly established debt, there is a presumption that a bankruptcy order will be made. However, section 266(3) of the Insolvency Act 1986 provides the court with a wide and quite unfettered discretion:

The court has a general power, if it appears to it appropriate to do so on the grounds that there has been a contravention of the rules or for any other reason, to dismiss the bankruptcy petition or to stay proceedings on such a petition; and where it stays proceedings on a petition it may do so on such terms and conditions as it sees fit…

So, when should the court intervene?

In the recent case of Glenn Maud v Aabar Block Sarl & others [2016] EWHC 2175 (Ch), the court considered whether the existence of an ulterior purpose would be one such reason.

The facts

The debt arose from a personal loan provided to Mr Maud for the purpose of on-lending to a group of companies (of which he was a director and shareholder of the Topco) that ultimately owned a property near Madrid, with an estimated value in the region of €3bn. Mr Maud defaulted on the loan. The loan was acquired by the petitioning creditors who eventually issued a statutory demand and subsequently a bankruptcy petition against Mr Maud.

Prior to the statutory demand being issued, Mr Maud instigated insolvency proceedings in Spain to protect the group’s asset and formed a consortium to bid to purchase the group, acquire the property and settle all the group’s debt (including Mr Maud’s personal debts). That consortium (which was also a creditor of Mr Maud for a significant sum) opposed the bankruptcy petition. The petitioning creditors constituted a rival consortium which intended to mount a competing bid.

Mr Maud believed that although the petitioners may have been interested in receiving a dividend through the bankruptcy, their primary purpose was an ulterior one: to gain effective control of the Spanish property.

What happens where there are multiple purposes behind a bankruptcy petition?

It is well established that court proceedings should not be used for the purpose of obtaining a collateral advantage. They should be used for the purpose for which those proceedings are designed. This is particularly relevant in an insolvency situation - bankruptcy is a class remedy for the collective enforcement of debts. There will, of course, be cases where the abuse is obvious, where a petitioner’s objective is manifestly wholly adverse to the class interest and it is evident that the collective proceedings are not being used for the purpose for which they are intended.

What happens, however, when there are multiple purposes behind a bankruptcy petition and only one of them is an ‘ulterior purpose’? Mr Maud asserted that although the petitioning creditors may have been interested in receiving a dividend from his bankruptcy, their primary objective was to gain control of the Spanish property.

The existing case law states that motive, being subjective reasons such as malice or personal animosity that cause a petitioning creditor to embrace a purpose, aim or objective in presenting or pursuing a petition, do not make a petition that is not otherwise an abuse of process, an abuse of process. Further the existing case law confirms that, a petitioning creditor who has more than one objective or purpose in presenting and pursuing a bankruptcy petition may be able to avoid a finding of abuse if one of his purposes is legitimate, even though that is not his principal purpose.

When will ulterior purpose be relevant?

Mr Justice Snowden held that the motives and objectives of a petitioning creditor are not necessarily irrelevant for the ultimate determination of the petition.

Where a petition is opposed by other creditors, the collective nature of bankruptcy proceedings requires the court to consider the views of creditors and to attribute weight to the views of individual creditors in deciding whether to grant the relief sought in the interests of the class. This will require a consideration of all circumstances.

When exercising its discretion, the court should consider the following issues:

Is the petitioning creditor abusing the process of the court in seeking a bankruptcy order or a winding up order for a purpose which is contrary or alien to the nature of the class remedy that he is purporting to invoke?

Secondly, if a petition (which is not an abuse of process) is opposed by other creditors, should the court grant or refuse a bankruptcy order or a winding up order in the interests of the class having evaluated the weight to be attached to the views of all of the various creditors in the class?

Finally, should the court, in the exercise of its case management powers, in any event adjourn the petition if it is persuaded that there is a reasonable prospect of payment of the petition debt in a reasonable time?

Conclusion

Whilst Mr Maud was successful on appeal, the bankruptcy petition has yet to be determined.

The complex factual matrix will continue, but for now, we have authority that where there are opposing creditors to a winding up or bankruptcy petition, the Court must evaluate the wishes of the creditors and attribute weight to the views of individual creditors. To this end, “ulterior motive” may be very important.

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